I’ve been watching the mammoth Bernie Madoff docuseries on Netflix recently – it’s called Madoff: The Monster of Wall Street and I can highly recommend it. Even if you know next to nothing about high finance, there will lots in it for you.
It’s a very probing and enthralling look at the life and crimes of Bernie Madoff, a man who was a highly respected financier on Wall Street for decades but was later exposed during the 2008 financial crash as a conman who ran a Ponzi scheme masquerading as a top-notch investment fund.
I think his story is a Greek tragedy – one man driven by status to fake his own success, regardless of the personal and public disaster this would bring. But what’s really shocking is how much he was enabled and overlooked by the authorities, in particular the Securities and Exchange Commission who should have been smelling a rat.
While you’d like to think that “lessons have been learned” (to use that somewhat clichéd phrase), you only have to look at various investment scandals since Bernie Madoff, whether it’s the downfall of UK fund manager Neil Woodford to the more recent questions raised by the collapse of crypto exchange FTX, to see just how much individuals need to be careful when they’re interacting with financial firms and how they can’t rely on regulation to save their skin no matter what.
So here are the three red flags that I picked up from watching the Madoff doc that I think could be helpful for anyone navigating the world of investing today.
- Watch out for affinity fraud. Some scammers will actively target people on based on shared characteristics like race, age, religion, gender etc. They do this to build trust and they often exploit a sense of frustration with the financial system that can be felt by folks belonging to minority groups. In the case of Bernie Madoff, the documentary shows how he cleverly promoted his scams to the well-off Jewish community in Palm Beach, Florida, really conveying that they could trust him with their hard-earned cash because hey, he was one of them. Sadly, this incredibly manipulative tactic is still being used by scammers today, and it’s one to look out for.
- Read between the lines. The idea that journalists weren’t looking into Bernie Madoff before his business collapsed is not true. There were articles written that might not have explicitly said he was a running a Ponzi scheme but certainly posed questions like “why was he so secretive about his business?” and “how was he able to keep producing such excellent returns?” This is where the media can and does perform a vital role, particularly when regulators are failing. But it’s up to readers to act on that information. So the next time you see an article or a video by a credible journalist who’s telling you something’s not right here, believe me, you should run a mile. Either the journalist knows more way more than they’re letting on and can only report what’s legally watertight or they’re scratching the surface of a much bigger story that will come to light sooner or later. Either way, you don’t want to be involved.
- Don’t go near anything that sounds too good to be true. The Madoff doc was a bit unclear as to how credible his investment returns seemed at the time. Of course, hindsight is a wonderful thing and the argument goes that Madoff got away with it partly because his returns were steady but not spectacular, so they seemed achievable. But dig a bit deeper (as some people did, like financial analyst like Harry Markopolos) and you’ll see that actually, the kind of consistency that Madoff was “achieving” was impossible. All investments have ups and downs, that’s the nature of the stock market, and even the best investment managers make wrong calls or have bad patches. Any investment that guarantees a return come what may is almost certainly fraudulent. So, if someone slides into your DMs or approaches you in the pub and tells you they’ve got an investment scheme where you cannot lose any money? Give them a wide berth.
If you want to read more about Madoff specifically, I also recommend you check out the first-hand account of his main whistleblower who I’ve already mentioned, Harry Markopolos – his book is ‘Non-one Would Listen’ and it’s a really shocking read. I also talk a lot more about how you can avoid investment scams in my own book, Own It.